Goldman Sachs’ 1MDB Woes Worsen

According to the news report by Bloomberg, Goldman Sachs Group Inc.’s woes related to the bank’s involvement in the 1MDB scandal have only worsened. Two Abu Dhabi investment fund are now suing the beleaguered bank, claiming in their lawsuit that the losses they suffered were due to the central role that Goldman Sachs had played in the Malaysian fraud and bribery case.
The two Abu Dhabi companies, International Petroleum Investment Co. (IPIC) and Aabar Investments claimed in their court filing that Goldman Sachs had paid bribes to ex-fund officials. These officials in exchange had agreed to manipulate as well as mislead both the companies. They also misused IPIC’s and Aabar’s names, infrastructure and networks to further their “criminal schemes” and also personally benefit from the ensuing transactions.
Goldman Sachs’ shares had fallen to their lowest in seven years on November 12 after the news broke about the bank’s involvement in raising money for 1MDB, the state-run Malaysian investment fund and that the Malaysian Finance Minister announced that he would be seeking a full refund from the lender.
1MDB had been set up by the former Prime Minister of Malaysia, Najib Razak. Its purpose had been to attract foreign investment. However, after it was created in 2009, the fund began to incur billions of dollars’ worth of debts and has been the target for multiple investigations in relation to bribery and corruption.
In this deal, Goldman Sachs made a massive $593 million in fees by working on three different bonds sales, which raised $6.5 billion for the Malaysian investment fund between 2012 and 2013. Banks typically do not make even a fraction of what Goldman made in such deals.

So far, at least 3 of the bank’s senior executives have been incriminated in the first round of charges against individuals by American prosecutors.
According to Bloomberg Intelligence analyst Alison Williams, the bank would continue to face a headline risk at least until such time as it resolved this case with US authorities.
Morgan Stanley’s analyst Betsy Graseck went a step further than just commenting. She cut her recommendation down from a “buy” to a “hold” rating on Wednesday, stated that it was not clear how long the 1MDB investigation would take, how much Goldman Sachs would have to pay in penalties and fines or even how much of a cost the bank would incur to satisfy regulators’ demands for compensation.
Graseck also stated that could be more lawsuits to follow, as well as internal investigations and reviews.
Currently, the Abu Dhabi companies have asked for an unspecified amount as damage in the lawsuit, which has been filed in the New York state court. The companies listed their claims in a summary filing that was less than 2 pages long. However, they said that a more substantial filing will be made in the next few weeks.
Goldman Sachs published its response, stating that it was currently assessing the allegations that had been made by the Abu Dhabi funds. The bank also stated that it was going to contest these claims strongly.
According to US officials, a small group of Malaysians siphoned money from 1MDB into their personal accounts and disguised it to look like it was a legitimate business transaction. This group of people also gave Malaysian officials a kickback using these siphoned funds.
Bloomberg Intelligence analyst Elliot Stein stated that the biggest concern that Goldman Sachs faced was the US Justice Department’s investigation and possible fines. He also stated that the allegations made by the Middle Eastern companies were not very strong, however, the negative publicity that the bank is garnering due to this lawsuit could linger for some time.

Luis Aureliano is a business writer and financial analyst. With over 15 years of experience in global finance and an MBA in economics and management, Luis’s areas of expertise include business, marketing, communications, personal finance, macro economics, stocks and emerging markets.

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